June 2011, ERES Eindhoven

Piet EichholtzMaastricht University

Sustainable Buildings:Performance, Users, Investors

Do we still see economic effects of green labels?Investment dynamics and the source of green increments

Sample of 28,000 office buildings (2009 cross section), 3,000 of which are certified by EPA or USGBC

1. New evidence on the economic premium for green office buildings Rigorous control for quality differences (PSM) Label vintage

2. Identify the sources of rent and value increments Explicit link to

LEED: the USGBC measure of “sustainability” Energy Star: the EPA measures of energy efficiency

Example: 101 California St, San FranciscoEnergy Star certified, LEED Gold

Example: 101 California St, San FranciscoEnergy Star certified, LEED Gold

Findings and implicationsEco-investment real estate sector is not only “doing good”

Ceteris Paribus, green buildings1. Have Higher Rents by 2-5%2. Have Higher Effective Rents by 6-7%3. Have Higher Selling Prices by 11-13%

The average non-green building in the rental sample would be worth $5.6 M more if it were converted to green.

The average non-green building sold in 2004-2009 would have been worth $11.1 M more if it had been converted to green.

This suggests that property investors value the lower risk premium inherent in certified commercial office buildings

The missing piece…what are the costs of “greening” properties?

Further regression results There seems to be an optimal LEED rating

Information on Energy Star-rated buildingsEmissions are substantial, and energy savings create value

Average emission of a building in our sample: 4,326 tons of CO2 750 cars, 9,000 barrels of oil, … Energy Star-rated buildings emit at least a quarter less carbon

as compared to conventional office buildings A $1 saving in energy costs is associated with an increase in

effective rent of 95 cents A $1 saving in energy costs is associated with a 4.9 percent

premium in market capitalization, which is equivalent to $13/sq.ft. This implies a cap rate of about 8 percent

Conclusions on building performanceLEED and Energy Star labels seem to be complimentary

Effects on rent and value still present despite economic crisis and increased supply of green office space

The green value effects are systematically related to the underlying characteristics of energy efficiency or “sustainability”

Market seems to be relatively efficient in pricing these aspects

LEED and Energy Star measure somewhat different aspects of “sustainability” and complement each other

Low correlation between LEED-score and EUI-score Low correlation between LEED score and energy consumption

Why would users rent green (and pay more)?Theoretical framework

1. Direct economic benefits Lower service costs of housing by reduced energy costs Higher employee productivity

2. Indirect economic benefits: Improved reputation and image Investors – cost of capital Employees – labor market Customers – sales and prices

3. Ethical behavior “Do the right thing” Non-profit, government, and governmental organizations

Incidence of Green Space Utilization by Major Tenants Fraction of Firm’s Office Space Housed in Green Buildings

Space Occupied (1) (2) (3)

Tenant Name Green Office Space Total Space

CoStar Green as

Fraction of Total Space CoStar

x 1000 sq. ft. x 1000 sq. ft. % Wells Fargo Bank 2,741 7,343 37.33% United States Government 2,415 14,631 16.50% Bank of America 2,124 18,695 11.36% ABN AMRO 1,724 2,993 57.60% State of California 1,568 5,706 27.49% Deloitte & Touche 1,554 5,131 30.28% Best Buy 1,500 2,104 71.31% U.S. Dept. of Health & Human Sc. 1,442 1,662 86.72% Shell 1,362 3,989 34.14% Chevron 1,229 6,181 19.88% Blue Cross & Blue Shield 1,211 12,251 9.89% Adobe Systems 1,158 1,388 83.43% Compuware Corporation 1,094 1,300 84.18% American Express 1,018 6,754 15.07% The Vanguard Group 990 1,569 63.07% Cal/EPA 950 950 100.00% Mitre Corporation 944 1,293 73.02% JP Morgan Chase 907 10,670 8.50% Skadden 889 1,751 50.77% Ernst & Young 864 4,149 20.83%

Green space utilization of major tenantsFraction of firm’s office space housed in green buildings

Incidence of Green Space Utilization by Industry Fraction of Office Space Housed in Green Buildings by Four-Digit SIC

Space Occupied (1) (2) (3)

SIC Code Industry Description Green Office Space Total Office

Space CoStar

Green as Fraction of Total Space

CoStar x 1000 sq. ft. x 1000 sq. ft. % 8111 Legal Services 25,593 217,097 11.79% 6021 National Commercial Banks 9,436 86,782 10.87% 9199 Executive, Legislative and General Office 9,035 67,081 13.47% 1311 Crude Petroleum and Gas 7,076 11,304 62.60% 6282 Investment Advice 6,532 100,939 6.47% 8721 Accounting, Auditing, and Bookkeeping Services 5,158 136,766 3.77% 5731 Radio, Television, and Consumer Electronics Stores 1,531 3,888 39.37% 9311 Public Finance, Taxation, and Monetary Policy 822 14,491 5.67% 7373 Computer Integrated Systems Design 816 19,487 4.19% 3812 Search, Detection, Navigation, Guidance, … 291 4,869 5.97% 2759 Commercial Printing, NEC 287 3,996 7.17% 3069 Fabricated Rubber Products, NEC 285 769 37.08% 4731 Arrangement Transportation of Freight and Cargo 282 8,348 3.38% 9621 Regulations and Adm. of Transportation Programs 280 9,115 3.07% 7997 Membership Sports and Recreation Clubs 274 1,696 16.15% 8641 Civic, Social, and Fraternal Associations 274 14,362 1.91% 2086 Bottled and Canned Soft Drinks, Carbonated Waters 261 5,037 5.19% 5411 Grocery Stores 253 8,363 3.03% 4724 Travel Agencies 252 7,539 3.34% 6552 Land Subdividers and Developers, 250 9,676 2.58%

Green space utilization per industryFraction of office space located in green buildings

And what do property investors do?Global sustainability survey: GRESB

Maastricht University surveyed global universe of property investors Initial collaboration with APG, PGGM, USS Tool for engagement and dialogue between investors and managers

Survey develops Global Real Estate Sustainability Benchmark: GRESB 2009

Policy issues: transparency, environmental policy, ... Implementation issues: environmental information systems, actual

consumption of resources, employee training and remuneration, … Score of 100 means that potential for shareholder value creation is used

GRESB 2011 now underway, results expected in Fall 2011 Now in cooperation with 15 leading pension investors worldwide All major industry bodies involved

GRESB 2009 resultsResponse

688 listed property companies and unlisted property funds surveyed Response rate

198 respondents, or 29% of total Market-weighted response rate was over 50% Response rate related to score on JLL transparency index

Strong variation in environmental performance across respondents Better performers are

from Australia, Sweden, U.K. listed

Weaker performers are from Asia, the U.S., southern Europe, Germany non-listed

Do investors do what they say?Property investors talk the talk, but hardly walk the walk

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GreenWalk Green Stars

Green Laggards GreenTalk

And the relation with financial indicators?Size matters, as do ROA and openness to equity market

M&P I&M TotalFinancialsMarket Capitalization 5.620* 7.897*** 6.994***(log) [3.014] [2.183] [2.269]Debt to Total Assets -0.0186 -0.0809 -0.0562

[0.319] [0.192] [0.230]Return on Assets 0.582 0.978** 0.821*

[0.487] [0.446] [0.441]Percentage of Closely Held Shares -0.207 -0.296** -0.260**

[0.159] [0.129] [0.128]

Property Type Controls Y Y Y

Country Controls Y Y Y

Observations 61 61 61R-squared 0.436 0.640 0.588Adj R2 0.231 0.509 0.439

For questions and remarks:

p.eichholtz@maastrichtuniversity.nl

For more research:

www.epri.euwww.gresb.com